I’m neither surprised nor heartbroken…
When I wrote my post about payday lending, I pointed out that select commercial banks were offering products similar to those offered by payday lenders. According to this article, the banks have exited this business, citing the new rules set up by the FDIC and the OCC:
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the currency set new rules last year for payday loans — called “deposit advance products” by banks and bank regulators — last year, and the largest banks in the business, including Wells Fargo, Fifth Third Bancorp of Cincinnati and Regions Financial of Birmingham, Ala., have either exited the business or announced plans to do so.
Banks of course have an advantage in the business over non-bank payday lenders because the bank’s customers have deposit accounts, and the bank can quickly review a customer’s history of direct deposits when making a loan decision. But the banks have shied away from the business because of the new rules. These include a “cooling off period,” limiting customers to one payday loan a month, as well as a requirement for the bank to assess a deposit advance loan customer’s eligibility for the loans every six months, including a detailed analysis of checking-account inflows and outflows, factoring in overdrafts and drafts from savings account…
Even though the banks were able to offer lower fees than the typical non-bank payday lender, those fees still translated into triple digit APRs. Furthermore, the banks made their money the same way non-bank payday lenders make theirs – multiple back-to-back loans where the loan isn’t paid off but rolled over.
The new rules crack down on this. Strict underwriting requirements in addition to reducing the frequency of loans means that banks would generate less revenue and incur higher costs. Given my belief that the returns in this business aren’t particularly impressive (an argument I made in my previous post), I’m not at all surprised to see the few banks in the payday lending business leave the business.
Is this a good thing? People that dislike the payday lending business may say so, but the banks for all their faults were the cheapest payday lenders in the market. That option is no longer available to them. Unless lenders decide to step into this positions, borrowers that could have gone to a bank now have to go to more expensive alternatives.
Does this strengthen the argument that the U.S. Post Office should enter this business? My answer is no, but I’m interested in hearing anyone that thinks otherwise. I’ll discuss the Post Office in a feature-length post.